Federal Bank Execution Remains Crucial As It Eyes Top Six Spot

Federal Bank Ltd. aims to rank among the top six players across key profitability metrics over the medium term driven by margin improvement. However, the execution of key initiatives remains crucial, according to analysts.

The improvement in key metrics by fiscal 2028 will be led by improved cost of funds, a rise in yields from medium-yielding secured business focus and improved fee lines, Dolat Capital said in a note after an analysts' meet earlier this week.

The lender will go for more organic sourcing, resulting in higher initial costs but better profitability at a later stage, it said. Dolat Capital maintained its 'accumulate' rating with a target price of 210 per share, implying a 17% upside.

While the initiatives towards organic sourcing, branch strategy, and focus on liabilities to enhance net interest margins are appreciated, execution remains key, the brokerage cautioned.

The private sector bank reported a 5% decline in net profit at Rs 955 crore in the third quarter ended December 2024. However, total income increased to Rs 7,725 crore during the reporting quarter from Rs 5,593 crore in the same period a year ago.

Operating profit grew to Rs 1,559 crore compared to Rs 1,437 crore in the third quarter of the previous fiscal.

Federal Bank, in its analysts' day meeting, demonstrated how it is charting the future by "strengthening its foundation and expanding horizons," Axis Capital said. The brokerage reiterated the bank's focus on improving key metrics to be driven by improvement in the cost of deposits rather than through yield on loans. 

"While the direction and intent are correct, we think this could slow down growth in the near term," Axis Capital said in the note. It maintained its 'add' rating with a target price of Rs 205 per share, maintaining the potential upside of 14%.

The bank would accelerate investments in products, and digital and physical distribution, Nuvama Institutional Equities mentioned among its takeaways from the analysts' meet. New products shall be launched with a special focus on wealth, affordable housing, used commercial vehicles and tractors, it said.

The focus will be on execution, the brokerage noted. Federal Bank's recently appointed Chief Executive Officer KVS Manian emphasised that "execution is more important than strategy." Nuvama reiterated its 'buy' on the stock with a target price of Rs 215 apiece, implying an upside of nearly 17% from the previous close.